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How Are Ssa Retirement Benefits Calculated

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How Social Security Retirement Benefits Are Calculated [3 Easy Steps]

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Visit Your Local Social Security Office

Your local Social Security office will be able to give you a benefit estimate if you go and request it. You will need to take proper identification so that the agents there can release this information to you. It is wise to make an appointment beforehand so that you do not spend hours waiting in line to get this information. You should also know that the estimated Social Security statement that you receive from your local SSA office only takes into account your past earnings record. They will not take into account any future earnings or wage increases. While this can give you a ballpark figure on your future benefit amount, it might not be quite as exact as some of the other methods available.

Can Your Pia Change After You Reach Age 62

There are two things that affect your PIA after you reach age 62:

  • Higher earnings: Earnings in years between age 62 and 70 that are higher than one of the 35 highest earnings years previously used in the formula will change your AIME, which is used in the PIA formula.
  • Inflation: Your PIA will be adjusted by the same cost-of-living adjustments applied to people who are already receiving Social Security benefits. You can see historical cost-of-living adjustment rates on the Social Security Administration’s website.
  • You may get the wrong answer when running your own calculations on when to begin Social Security if you simply take the numbers off your statement and do not properly apply inflation adjustments.

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    How Inflation Impacts Your Pia

    Your PIA is calculated at age 62. If you wait beyond age 62, cost-of-living adjustments will be applied to your PIA for each year afterward.

    If you have already had most of your 35 years of earnings, and you are near age 62 today, the age 70 benefit amount you see on your Social Security statement will likely be higher due to these cost-of-living adjustments. Many people do not account for this when doing their own calculations, which can lead them to think that taking Social Security early is a better deal, when waiting is often the better deal.

    In the table below, our hypothetical worker, born in 1954, is eligible for full retirement at age 66. The column on the right shows the effect of inflation for waiting beyond age 62 to take their benefits.

    Effect of Age on Claiming Benefits
    Year

    List Each Year’s Earnings

    How To Calculate Social Security Retirement

    Your earnings history is shown on your Social Security statement, which you can now obtain online.

    In the table below, sample earnings for a hypothetical worker born in 1953 are shown in Column C. Only earnings below a specified annual limit are included. This annual limit of included wages is called the “Contribution and Benefit Base” and is shown as Max Earnings in Column H in the table.

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    Can You Still Work While Receiving Social Security

    You can continue to work while you receive Social Security benefits. But there is a limit to how much you can earn and still receive full benefits. The earning limit may be adjusted each year.

    If you earn above the limit, Social Security will deduct a certain amount of your benefits each year.

    Social Security Benefits, Earning Limits and Penalties

    RETIREMENT AGE
    SSA deducts $1 from your benefits for every $3 you earn above the limit

    How Does The Social Security Administration Calculate Benefits

    Benefits also depend on how much money youâve earned in life. The Social Security Administration takes your highest-earning 35 years of covered wages and averages them, indexing for inflation. They give you a big fat âzeroâ for each year you donât have earnings, so people who worked for fewer than 35 years may see lower benefits.

    The Social Security Administration also makes annual Cost of Living Adjustments, even as you collect benefits. That means the retirement income you collect from Social Security has built-in protection against inflation. For many people, Social Security is the only form of retirement income they have that is directly linked to inflation. Itâs a big perk that doesnât get a lot of attention.

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    What Is The Social Security Benefits Formula

    The Social Security benefits formula is a formula used to determine your primary insurance amount, or the amount of money you’d be entitled to if you claimed benefits at the age designated by law as your full retirement age. If you claim benefits before full retirement age — aged 65 to 67 depending, when you were born — you’ll receive a smaller benefit than the primary insurance amount. If you claim benefits after, you will receive a larger benefit.

    The Social Security benefits formula used to determine your primary insurance amount is:

    • 90% of average indexed monthly earnings up to a first bend point. Bend points are income limits set each year based on changes to the Average Wage Index, which is a measure of wage trends.
    • 32% of AIME between a first and second bend point
    • 15% of AIME above the second bend point

    AIME is calculated by taking wages earned over your career and adjusting for inflation using the Average Wage Index. The Social Security Administration adds up inflation-adjusted wages for the 35 years you earned the most, divides by 35 to get your average annual wage, then divides by 12 to get your average monthly wage. This is the AIME used in the formula.

    Adjust Your Primary Insurance Amount If You Claim Benefits Before Or After Full Retirement Age

    How to Calculate Your Social Security Benefits

    All the above calculations determine the primary insurance amount if you claim benefits at full retirement age — but you may decide to claim benefits before or after FRA. You can claim benefits as early as age 62. But if you claim benefits before FRA, your benefits are decreased by:

    • 5/9 of 1% per month for each month prior to FRA for the first 36 months
    • 5/12 of 1% per month for each additional month if you claim more than 36 months before FRA

    If you claim benefits after FRA, benefits are increased by 2/3 of 1% for each month you wait up until age 70.

    The table below shows FRA depending on your birth year:

    If You Were Born in Your FRA Is

    Table source: Social Security Administration.

    Depending when your FRA is, you’d apply the benefits reduction or increase to your primary insurance amount. For example:

    • If FRA is 67 and you claim benefits at 66, that’s 12 months early. Multiply the per month-reduction *.01) times 12 months to see that benefits are reduced by around 6.7%.
    • If FRA is 66 and you claim benefits at 62, that’s 48 months early. Multiply the per month-reduction for the first 36-months *.01) times 36 months + the additional reduction of *.01) times 12 months. This gives you 0.20 + 0.05, which amounts to a 25% reduction in your primary insurance amount.
    • If FRA is 67 and you claim benefits at 69, that’s 24 months late. Multiply the per-month increase *.01) times 24 months to see benefits are increased by 16%.

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    Why You Need To Supplement Your Social Security Benefits

    First off, Social Security was intended to be a supplement to people’s retirement savings. The National Institute on Retirement Security describes retirement income as a ‘three-legged stool’, consisting of Social Security, a pension plan, and individual retirement savings through accounts like a 401 or an individual retirement account.

    However, since the 1980s, fewer and fewer companies have been offering pension plans to their employees. The onus for saving for retirement has fallen on the employee.

    And most people aren’t doing great when it comes to saving for the future: A 2020 NIRS study found that 40% of Americans rely on Social Security as their sole source of retirement income. The average annual Social Security benefit for a worker is nearly $20,000, hardly enough money for most retirees to subsist on.

    When it comes to saving for retirement, it’s important to start as early as you can, whether that’s through an employer-sponsored 401 or a traditional or Roth IRA. By saving for retirement early in life, you’ll reap the benefits of compound interest, which is interest earned on interest.

    For example, if you started saving for retirement when you’re 25 and had investments yielding a more conservative 6% return, you would need to invest $530 per month for 40 years to reach $1 million. If you waited until you were 40 and had investments yielding a 6% return, you would need to invest $1,500 per month for 25 years to end up with $1 million.

    When Should You Apply For Social Security Benefits

    You can begin receiving Social Security at age 62. However, starting at that age means those benefits will be about 30 to 35 percent less each month than what you will receive if you delay benefits until you reach what the government considers your full retirement age.

    Waiting past your full retirement age before you draw Social Security can also mean you will receive larger monthly benefits.

    Full Retirement Age Based on Birth Year

    Year of Birth

    Social Security is designed to replace about 40 percent of employment income, on average.

    However, that is not the same with every worker. Social Security will replace a higher percentage of the income of lower-income workers and a lower percentage of the income of higher-earning workers.

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    How Social Security Benefits Are Calculated

    Qualifying for Social Security in the first place requires 40 work credits or approximately 10 years of work. To be eligible to receive the maximum benefit, you need to earn Social Securitys maximum taxable income for 35 years. The cap, which is the amount of earnings subject to Social Security tax, is $147,000 in 2022, up from $142,800 in 2021.

    Social Security benefits are calculated by combining your 35 highest-paid years . First, all wages are indexed to account for inflation. Wages from previous years are multiplied by a factor based on the years when they were earned. This calculation gives an amount comparable to buying power based on the current value of the dollar. Accounting for this valuation change is important because a salary of $14,000, for example, was far more impressive in 1954 than it is today.

    Once all wages have been indexed, your average indexed monthly earnings is computed by dividing the sum of all indexed wages by 420 . If you worked fewer than 35 years, a zero is entered for years when you did not work. The benefit amount is then calculated based on factors that include the year when collection begins, whether you have reached FRA, and whether you continue to work while collecting benefits.

    Once you reach age 70, there is no reason to wait longer to start collectingyour benefit wont increase further.

    What About Taxes On Social Security

    Social Security Age Chart: When to Start Drawing Bene...

    Social Security benefits may be taxable, depending on your “combined income.” Your combined income is equal to your adjusted gross income , plus non-taxable interest payments , plus half of your Social Security benefit.

    As your combined income increases above a certain threshold , more of your benefit is subject to income taxâup to a maximum of 85%. For help, talk with a CPA or tax professional.

    In any case, if you’re still working, you may want to postpone Social Security either until you reach your full retirement age or until your earned income is less than the annual limit. In no situation should you postpone benefits past age 70.

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    Cost Of Living Adjustments

    Cost of living adjustments is one of the most common reasons for higher Social Security benefits. The SSA uses the Consumer Price Index as part of its benefits calculation. When the cost of living increases according to the CPI, the law states that benefits must increase.

    The COLA was 5.9% in 2022, but that increase was larger than in past years, likely due at least in part to COVID-19. For example, it was 1.3% in 2021 and 1.6% in 2020. Although the COLA is higher in some years than in others, you can usually expect at least a small increase in your benefits every year.

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    Benefit Reduction If Taken Before Full Retirement Age

    When calculating benefits for early retirement, there are one or two calculations, depending on how early benefits are taken. Assuming a normal retirement age of 67, the age of 62 is the earliest year a person can receive benefits or 60 months early.

    The benefit is reduced by 5/9 of 1% for each month before the normal retirement age , up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of 1% per month.

    For example, let’s say that a person wants to retire at 62, leading to a 60-month reduction from the normal retirement age of 67. The first 36 months would be calculated as 36 months times 5/9 of 1% plus 24 months times 5/12 of 1%.

    • First 36 months: 5/9 = .5555 * 1% = .005555 * 36 months = .19999 or 20%*
    • Remaining 24 months: 5/12 = .416666 * 1% = .00416666 * 24 months = .0999 or 10%
    • In other words, benefits would be reduced by 30% if taken at age 62.

    *The results were rounded and multiplied by 100 to create a percentage.

    How Much Do You Have To Make To Get Maximum Social Security

    How Social Security benefits are calculated on a $35,000 salary

    To receive the maximum Social Security benefit, youd need to earn at least the maximum wage taxable by Social Security for 35 years and delay claiming the benefit until you reach 70. The earnings cap adjusts every year based on changes to the national average wage index and is $147,000 in 2022, up from $142,800 in 2021.

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    How Do I Qualify For Social Security Retirement Benefits

    When you work and pay taxes, you earn credits toward Social Security retirement benefits. These credits are based on your annual earnings you can accrue a maximum of four credits per year. Once youve acquired 40 credits , youre fully insured and eligible to receive retirement benefits.

    Your paychecks will withhold Federal Insurance Contributions Act tax until youve earned up to the taxable earnings base for the year.

    Social Security For Spouses And Survivors

    Spousal benefits are available to current or widowed spouses aged 62 or older. Applications for spousal benefits are not valid until the other spouse files for their own benefits. It is possible for a non-working spouse to be eligible for a spousal benefit based on their working spouse’s benefit. Based on the working spouse’s age of retirement, the spousal benefit can be up to half of the working spouse’s benefit.

    A widow or widower can collect a survivor benefit as early as age 60, given that the marriage lasted more than nine months. This requirement is waived if the widow or widower has a child under the age of 16. In the case where both individuals in a married couple are receiving SS benefits, and one dies, the widow or widower can continue receiving their own benefit or their spouse’s, but not both. It is also possible for a widow or widower to switch benefits in retirement. For instance, if the deceased spouse was scheduled to receive larger benefit amounts at age 70, the widow or widower can first file for their own benefits, then claim their former spouse’s benefits later in order to maximize payments.

    A person who is divorced, who was married for more than 10 years and has not remarried, can receive benefits based on their ex-spouse’s work history as long as the divorced person meets all of the following conditions:

    The ex-spouse’s benefits can also be claimed even if the ex-spouse has not filed for their own benefits, as long as both parties are above age 62.

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    Will A Government Pension Impact My Retirement Benefits

    If you worked for an employer that didnt withhold FICA taxes from your salary, such as a government agency, the pension you receive based on that work may reduce your Social Security retirement benefits. This reduction, as part of the windfall elimination provision , affects individuals who earned a pension in any job where FICA taxes werent paid and who worked in other jobs long enough to qualify for Social Security retirement benefits.

    In addition to a reduction in individual benefits, spousal and/or survivor benefits may also be reduced accordingly. In this case, Social Security benefits will be reduced by two-thirds of the government pension.

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